Two lawyers from the Securities and Exchange Commission (SEC), Michael Welsh and Joseph Watkins, have resigned following a federal judge's sanctioning of the Wall Street watchdog for a "gross abuse" of power. The resignations occurred after an SEC official informed them they would face termination.

The case in question involved Digital Licensing Inc., also known as DEBT Box, a crypto platform that the SEC had accused of defrauding investors. In July, the SEC charged the company and its executives with fraud, claiming they had swindled investors out of at least $49 million. Following the SEC's allegations, Federal District Court Judge Robert Shelby in Salt Lake City ordered an asset freeze and placed the company into receivership.

However, the SEC's actions came under scrutiny after Judge Shelby identified false statements and misrepresentations in the regulator's lawsuit. The judge highlighted a lack of evidence to support the SEC's claims and subsequently reversed the asset freeze. In a significant rebuke, Judge Shelby sanctioned the agency in March for the "gross abuse of power" and ordered it to cover some of DEBT Box's legal expenses.

Welsh, who was the SEC's lead trial attorney, and Watkins, the lead investigative attorney on the case, faced criticism for their roles in the proceedings. A pivotal moment occurred when Welsh falsely informed the court that DEBT Box was transferring assets overseas and closing bank accounts, a claim that was later proven incorrect. An SEC investigator cited a miscommunication as the cause of the error, and Welsh issued an apology to the court for the misinformation.

In December, SEC enforcement chief Gurbir Grewal extended an apology to the court for the department's behavior in the case, assigning new attorneys to the matter and introducing additional training for the enforcement staff.

The legal counsel for DEBT Box has abstained from commenting on the resignations. Meanwhile, legal representatives for DEBT Box and other involved parties have filed motions requesting that the SEC be held responsible for over $1.5 million in fees and other costs accrued during the case.

Earlier in the month, the SEC sought to dismiss the lawsuit against DEBT Box without prejudice, a motion on which Judge Shelby has yet to make a decision. The case's current status and its potential implications for the SEC's enforcement practices remain under scrutiny, as the regulatory body deals with the fallout of the judge's rebuke and the subsequent staffing changes.

Bloomberg Report